Cost, need questioned in $433-million smallpox drug deal

A company controlled by a longtime political donor gets a no-bid contract to supply an experimental remedy for a threat that may not exist.

Instead, the administration moved to block all companies — except Siga — from bidding on a second offering of the contract.

In early December, officials completed a required "justification for other than full and open competition," which said an antiviral against smallpox was needed within five years and Siga was the only company able to meet that timetable.

The rationale was questioned by some in HHS, including contracting officer Brian K. Goodger, who in an internal email called it "a stretch."

On Feb. 18, HHS terminated the original contract and requested a proposal from Siga.

Siga and government officials soon began tangling over the price the company would be paid. Because the contract was no longer to be awarded based on competition and because the only customer was the government, officials sought to assess whether the company's proposed price was "fair and reasonable," as required by federal law.

In so doing, officials looked at how much government money had already gone into developing ST-246. Public records show $115 million in federal support, not including the stockpile contract.

After reviewing Siga's costs and the prices of other drugs produced in low volumes compared with commercial products, the HHS negotiators wanted to pay about $170 for each treatment. The company argued for more based on ST-246's potential value to the nation.

"Siga did not derive its price based on any cost information, and, from Siga's viewpoint, such information is not relevant to determination of an appropriate price," the company's chief financial officer, Daniel J. Luckshire, wrote to Lurie's office and others on March 4.

"Siga has created extremely valuable intellectual property, embodied in ST-246, and Siga has priced ST-246 based on the value of that intellectual property," Luckshire added.

After the two sides had conferred and again aired their differences, a senior HHS official, Michael A. Balady, told a colleague in an email April 4 that the negotiations "went extremely badly.… They are intransigent on price."

On April 6, Rose emailed the government's chief negotiator, D. Andre Early, saying the two sides were "at impasse." Rose said "any further negotiation should occur with a more senior official [with] the authority to take into account the important policy issues that surround this procurement."

Two days later, Lurie wrote her conciliatory letter to Rose, pledging to install a new lead negotiator. Her top subordinate, Balady, followed through by naming Goodger to replace Early, who continued to work on the contract but not as lead negotiator.

A financial analyst for RBC Capital Markets reported to investors in May that the agreed-upon price per dose appeared to be $255. He arrived at that estimate by dividing the $433-million contract by the 1.7 million doses to be delivered. Siga told The Times that this would give a rough approximation of the per-treatment price.

On May 13, HHS announced what amounted to the second awarding of the contract, worth between $433 million and $2.8 billion, depending on whether the government exercised options to buy more of the drug in future years. Siga hailed it as a "historic event for the biodefense industry."

FDA skepticism

Throughout the negotiations over price and profit, a separate issue loomed: uncertainty over whether the Food and Drug Administration would approve ST-246 for use in humans.

For more than a year, the enthusiasm of HHS officials for stockpiling the drug has stood in contrast to the skepticism of the FDA. The agency's stance is important because the contract requires Siga to develop its drug "for ultimate approval by the FDA."

In a June 2010 email, Gary Disbrow, a virologist in HHS' biomedical unit, shared with colleagues his assessment of where the FDA stood on the smallpox drugs being developed by Siga and Chimerix, the North Carolina company: "My interpretation of their current position is that there is NO foreseeable path to licensure."

The problem was the inherent limits of animal testing in determining whether the drugs would be safe and effective in fighting smallpox in humans. Researchers are prohibited from infecting humans with the virus.

In May of this year, Robert G. Kosko Jr., a manager in the FDA's antiviral-products division, wrote that there was "no clear regulatory path" for approving antiviral drugs for smallpox — again because of the uncertainty surrounding proof of effectiveness.

The FDA has scheduled a public meeting in December to discuss Siga's and Chimerix's drugs. Siga's contract requires it to conduct additional studies to seek the agency's approval.

Lurie said she hoped the FDA would ultimately approve ST-246. "We would not have gone ahead with a procurement unless we thought there was a pathway," she said.

Short shelf life

Unlike the smallpox vaccine, which remains potent for decades, Siga's drug is guaranteed for only 38 months.

The administration had intended to award Siga the exclusive option to replenish or expand the stockpile, but officials relented after Chimerix formally protested. In June, the government settled the dispute by dropping the exclusivity provision. That limited the value of Siga's contract to $433 million and meant that other companies could compete to fill future orders for the drug.

"Though unhappy about it, Eric [Rose of Siga] would rather remove the options than take the chance of possibly losing the protest and thus the entire contract," Goodger wrote to his superiors on June 11.

HHS officials, however, were concerned about how Siga might react. Goodger reassured his higher-ups that despite its disappointment, the company would not seek "any negative publicity."